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CPI inflation at three-month high in Feb’21; IIP contracts again in Jan’21

Do not expect any change in policy rates or stance

* CPI-based retail inflation came in at a three-month high of 5% YoY in Feb’21 (v/s 4.1% in Jan’21 and 6.7% in Feb’20), in line with market consensus and our forecast.

* Higher inflation was primarily on account of higher food inflation (CPI weightage: 39%), which also came in at a threemonth high of 3.9% YoY in Feb’21 as against a 20-month low of 1.9% YoY in Jan’21. What’s worrying is that CPI inflation, excluding food, touched a 28-month high of 5.8% YoY in Feb’21 from 5.5% YoY in Jan’21.

* Inflation in core items (CPI weightage: 44.9%) rose to a three-month high of 5.6% YoY in Feb’21 from 5.3% each in the preceding two months on higher inflation in ‘clothing and footwear’ and ‘miscellaneous’ items. Within ‘miscellaneous’ items, health and transport and communication were the major drivers.

* IIP declined 1.6% YoY in Jan’21 compared to +1.6% YoY in Dec’20. This fall was contrary to market consensus and our expectation of +1% in Jan’21. The contraction was led entirely by manufacturing activity.

* Manufacturing (IIP weightage: ~78%) activity contracted 2% YoY in Jan’21 as against a growth of 2.1% YoY in Dec’20. The other two components – mining and electricity – did rather well during the month. According to use-based classification, production of Capital Goods declined at the highest pace in five-month (9.6% YoY) in Jan’21 and Consumer Goods fell 4.2% YoY.

* With actual IIP numbers, our monthly EAI-GVA for Jan’21 now stands revised, indicating a growth of 4.8% (from 4.9% earlier). The pick-up in CPI inflation and the fall in IIP does not make the Monetary Policy Committee’s (MPC) task any easier. While we hope that IIP would return to positive territory in Feb’21, we expect inflation to edge up further to ~5.4% in Mar’21. Accordingly, we expect the MPC to maintain status quo at its Apr’21 policy meeting.

I. Retail inflation at three-month high in Feb’21

* CPI inflation rose in Feb’21…: CPI-based retail inflation came in at a threemonth high of 5% YoY in Feb’21 (v/s 4.1% in Jan’21 and 6.7% in Feb’20), in line with market consensus and our forecast (Exhibit 1).

* …due to rise in food inflation: The latter (CPI weightage: 39.1%) came in at a three-month high of 3.9% YoY in Feb’21 as against a 20-month low of 1.9% YoY in Jan’21 and 10.8% YoY in Feb’20. While vegetable deflation moderated to 6.3% YoY in Feb’21 from a 25-month high deflation of 15.8% YoY in Jan’21, inflation in other food items (‘cereals and products’, ‘pulses and products’, ‘meat and fish’, ’eggs’, ‘milk and products’, ‘spices’ and ‘sugar and confectionery’), accounting for ~27% weightage in CPI, actually stood lower in Feb’21 than in Jan’21. The two food items which exhibited higher inflation in Feb’21 were ‘oil and fats’ and ‘fruits’. What’s worrying is that CPI inflation, excluding food, touched a 28- month high of 5.8% YoY in Feb’21 from 5.5% YoY in Jan’21.

* Core inflation rose to a three-month high in Feb’21: Inflation in core items (housing, clothing and footwear, and miscellaneous items – CPI weightage: 44.9%) rose to a three-month high of 5.6% YoY in Feb’21 from 5.3% each in the preceding two months on higher inflation in ‘clothing and footwear’ and ‘miscellaneous’ items. Within ‘miscellaneous’ items, health and transport and communication were the major drivers of higher inflation.

* Other non-food items however showed mixed signals: While items such as ‘non-alcoholic beverages’ and ‘prepared meals, snacks, sweets, etc.’ exhibited

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